Year-End Tax Planning and Scholarship Tax Credits

State & Local Tax Alert: Alabama Edition

Client Alert


The Alabama Accountability Act of 2013 provides state income tax credits to certain donors who make contributions to a qualified scholarship granting organization operating within Alabama, including our client, the Alabama Opportunity Scholarship Fund (AOSF). These tax credits present an opportunity to help Alabama’s neediest school children at little or no cost to the donor, a tax planning option that individual and C corporation taxpayers should keep in mind.

Under the Act, C corporations can donate to a state-approved nonprofit “scholarship granting organization” (SGO) and receive a 100% credit against their Alabama corporate income tax liability, up to half of which can be used to offset their current tax liability. Individuals may also donate to one of these organizations and receive a 100% income tax credit, up to $7,500 annually. Any unused credit may be carried over for up to three years. Presently, pass-through entities, like LLCs and S corporations, are not eligible, and the credit is limited to the Alabama income tax. Each year, $25,000,000 of tax credits are available. There is a helpful set of FAQs about the donor tax credit aspects of the program on the AOSF website.

According to AOSF guidelines, donated funds will be used to empower low-income parents to choose a different school for their children, if their assigned public school is considered a “failing school” by the Alabama Department of Education. By state law, 95% of all donated funds must be used for scholarships—only 5% or less may be used for administrative costs. All scholarship students must be tested each year with a nationally recognized standardized test, with the results being reported to the state. All qualified SGOs must undergo a full audit by a CPA firm each year and are also subject to audit by the Alabama Department of Revenue, which must pre-approve each SGO.

The demand from parents for educational choice is evident. This past year, parents of nearly 12,000 children applied to AOSF for scholarships. From these applications, AOSF granted approximately 2,800 scholarships for the 2014-2015 academic year to families whose average household income was $20,687 and all of whom qualified for the federal free and reduced price lunch program.

There are several potential benefits to participating in this program—both tangible and intangible. If you have an interest or any questions, please contact Ms. Lesley Searcy, the Executive Director of AOSF, at Since AOSF is a client of our firm, we recommend that you make any decisions regarding an investment in this program only after conducting your own due diligence and seeking the advice of your tax advisers.